Of the 8 "most important ever" FOMC decisions in 2013, this one is undisputedly, and without doubt, the 8th. As Jim Reid summarizes, what everyone wonders is whether today’s decision by the FOMC will have a bearing on a few last-minute Xmas presents around global financial markets. No taper and markets probably breathe a sigh of relief and the feel-good factor might turn that handheld game machine into a full-blown PS4 by Xmas day. However a taper now might just take the edge off the festivities and leave a few presents on the shelves. Given that the S&P 500 has pretty much flat-lined since early-mid November in spite of better data one would have to say that some risk of tapering has been priced in but perhaps not all of it. Alternatively if they don’t taper one would expect markets to see a pretty decent relief rally over the rest of the year. So will it be Santa or Scrooge from the Fed tonight at 2pm EST?
Treasuries rallied from the pre-open release of inflation data this morning and never looked back (with 30Y unch on the week and 5Y -4bps). Stocks tumbled notably through the US open but recovered as Europe closed hovering quietly around VWAP all afternoon. The rally back in stocks coincided with a drop in VIX which smacked of hedges being lifted and exposure being reduced into the momentum-ignoted strength. Gold and silver saw weakness (though the latter is still +1% on the week). The USD weakened notably as Europe closed with some significant CHF buying. Stocks closed ugly...as VIX was significantly bid (up for the 6th day in a row - and 14 of last 16 days) and the 4th Hindenburg Omen appeared as the cluster grows.
"I got up this early to talk, not to listen," Jim Grant berates Fed-apologist Steve Liesman as the two go head-to-head over the fallacy that QE has been a success. "The Fed can change how things look, it cannot change what things are," is the single-sentence summation of the mirage that the Fed's "dangerous monetary manipulation" has created...
As we noted earlier today, if there was one piece of news that could tip the scales away from a December taper announcement, it was a November inflation number that came in below expectations. Which it did: the headline November inflation print came in unchanged, on expectations of a 0.1% increase for the month, and up 1.2% for the year, below the 1.3% expected. However, before you BTFATH, note that core inflation - the Fed's preferred metric - actually was higher than expected, with prices ex food and gas, rising 0.2% in November on expectations of a 0.1% increase. Indeed, looking at the components, the headline inflation number was dragged down by gasoline prices which dipped 1.6% in November and overall Energy costs which fell 1.0%. Also notable: apparel inflation was -0.4% in November - the third consecutive month of declines. However, back to the core number, annual inflation was up 1.7% Y/Y just shy of the Fed's target, while core service inflation is up 2.4%.
Today (like pretty much every other day), it will be all about the Fed and the start of its 2-day FOMC meeting, whose outcome will be influenced by today's 8:30 am CPI report as inflation (Exp. 0.1%) according to many is the only thing stopping the Fed from tapering in light of better than expected recent economic data as well as a clearer fiscal outlook. Or at least that's what the watercooler talk is. The hardliners now agree that since the Fed openly ignored the bond market liquidity considerations in September, that it will plough on through December with no announcement, and potentially continue into 2014 with zero chances of tapering especially now that we approach the end of the business cycle and the Fed should be adding accommodation not removing it. To that end, the consensus still is in favour of January or March for the first taper so markets are not fully set up for a move; conversely a dovish statement would probably result in yet another pre-Christmas, year end market surge, which in the lower market liquidity days of December is likely what the Fed is going for, instead of a volatile, zero liquidity sell off, despite Thursday's double POMO.
Saying we need continuous financial bubbles to keep full employment is such a flawed conception of economics, it belongs on an island of misfit philosophies. Krugman’s incessant promotion of statism is doing more harm to the economy than good. As an opinion-molder, he is perpetuating the economic malaise of the last few years. More bubbles won’t help the recovery, just harm it more. In the middle of a grease fire, Krugman calls for more pig fat. And the rest of us are the ones left burnt.
Following last night's freak central-planning accident (previously in history known as "selling") in the S&P futures, we said that "we expect Overnight Ramp Capital to arrive promptly or else confidence in central-planning may take a hit ahead of the Wednesday Taperish FOMC, and Thursday's double POMO." A few hours later, even we were surprised by how high the low volume tape managed to drag ES, which staged a dramatic 20 point comeback, on the back of a sharp reversal in FX driven higher by both a stronger Euro (helped by better than expected German and Eurozone PMIs offsetting China PMI weakness, and lack of optimism in the core Japanese Tankan) and a weaker Yen, the two key signals for E-mini directionality. Sure enough, at last check the futures we trading just why of the "independence day" 1776, after briefly breaking the 50-DMA and then being supported by 1760 in the futures. The rest is perfectly predictable central-planning history.
- BAD TRADE #1 For 2014: Ignoring Mean Reversion
- BAD TRADE #2 For 2014: Which-flation?
- BAD TRADE #3 For 2014: Forgetting Late Cycle Dynamics
- BAD TRADE #4 For 2014: Blind Faith In Policy
- BAD TRADE #5 For 2014: Reaching for Yield During Late Cycle
November Producer Prices Decline For Third Consecutive Month, Rising Pork Offset By Falling Chicken PricesSubmitted by Tyler Durden on 12/13/2013 09:46 -0400
In the aftermath of a series of "better than expected", and thus "taper on" economic data, there is just one wildcard remaining for the Fed: inflation, or rather the lack thereof. And while next week's CPI report will be very closely watched in this regard, producer prices also provide a glimpse into pricing pressures and resource slack. And judging by the just announced -0.1% drop in finished goods producer prices in the month of November, below the 0.0% expected if up from last month's -0.2%, which happens to be the third consecutive decline in overall PPI, a first in the past year, the Fed's December taper decision just got even more complicated. Looking into the components, core PPI rose by the tiniest possible fraction, or 0.1%, in line with expectations, while it was energy prices that dipped 0.4%, pulling the overall number lower with the BLS noting that home heating oil's 5.7% decline was among the key culprits for the drop. Food producer prices were unchanged for the month, with higher prices for pork offset by lower prices for processed young chickens.
While the generic overnight futures meltup is present this morning, it is nothing compared to what the epic surge in the EURJPY early in the overnight session suggested it would be, and in fact the levitation in US equities driven as usual by Yen carry trades (just what is the P/E or PEG on the USDJPY, or the EURUSD for that matter?) is far more muted than seen in recent days. The main reason for the easing of the carry-risk signal pair is the increasing confusion over what may happen next week when increasingly more are convinced Bernanke will announce a Taper, and since everyone remembers the summer very vividly, the last thing anyone wants is to be the last Kool-aid drinker at the centrally-planned party.
It has been another session of overnight weakness, in which, to quote Deutsche Bank, "something has changed" as ES algos no longer track every tick of the EURJPY (or other JPY pair variants). Usually in such transition periods where the robots are not sure how to trade risk based on highly leveraged inputs, things go bump in the night, and they did just that with the E-Mini trading just off its overnight lows, despite a notable rise in the EURJPY from yesterday's close. Keep a close eye on the now traditional pre-market ramp in the EURJPY - if unaccompanied by an increase in the E-mini, it may be time to quietly exit stage left.
Despite hope (and talk) that Greece is on the path back to recovery, our recent discussion of the record deflation the nation is undergoing (and record unemployment) suggests Stournaras propaganda is just that. As Bloomberg's David Powell writes, the embattled nation continues to push further into depression and a state of insolvency and appears highly unlikely to be able to reduce the domestic price level in order to restore competiveness and simultaneously avoid a second restructuring of its sovereign debt. Perhaps that is why Troika delayed its appearance in Athens as it is easier to ignore the truth that way? Especially as beggars, once again, will become choosers in the "grexit" debate.
Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
The grind higher in equities, and tighter in credit, continues as markets brush aside concerns about a December taper for the time being. Overnight futures levitation has pushed the Fed balance sheet driven record high S&P even higher, despite as Deutsche Bank points out, the fact that we had three Fed speakers advocate or talk up the possibility of a December taper, including the St Louis Fed’s James Bullard who is viewed as a bit of a bellwether for the FOMC. Bullard said the probability of a taper had risen in light of the strengthening of job growth in recent months. Indeed, he noted that the best move for the Fed could be a small December taper given the improving jobs data but below-target inflation readings. The Fed could then pause further tapering should inflation not return toward target during the first half of 2014. Looking at today’s calendar, the focus will be on US JOLTs job openings - a report which Yellen has previously highlighted as an important supplement to more traditional labour market indicators. US small business optimism and wholesale inventories are the other major data releases today. As mentioned above, US financial regulators are due to announce Volcker rules at some point today although as we just reported, the CFTC's meeting on Volcker was just cancelled due to inclement weather.
The US data flow is relatively light which is typical of a post-payrolls week but it’s worth noting wholesale inventories on Tuesday and retail sales on Thursday. Importantly US House and senate negotiators are supposed to come to an agreement on a budget before the December 13th deadline. A lot of optimism has been expressed thus far from members of congress, and there are reports that a budget deal will be unveiled this week.